August 22, 2001
In the third part of a four-part series about the crisis of 1997, Thanong Khanthong takes a behind-the-scenes look at how East Asian nations came together to support Thailand and the IMF negotiations.
At the Tokyo meeting on August 11 and 12, 1997 there was a show of regional solidarity to bail out Thailand, which was facing a balance-of-payments crisis and a sagging baht.
Eisuke Sakakibara, the powerful deputy minister of the Finance Ministry, was the key person behind this arrangement. He co-hosted the Tokyo meeting with the International Monetary Fund (IMF) at the Imperial Hotel.
Representatives of 12 countries were invited to attend. These were Australia, Canada, China, France, Germany, Hong Kong, Indonesia, South Korea, Malaysia, Singapore, Britain and the United States. Apart from the IMF, there were also representatives from the World Bank and the Asian Development Bank.
Timothy Geithner, the assistant treasury secretary, represented the US at the Tokyo meeting. At that point, the US still had reservations about Thailand's attempt to enter the IMF programme.
Sakakibara was smart in his manoeuvring tactics. He quietly lobbied behind the scenes for all the member countries to extend financial assistance to Thailand. When the actual meeting took place, he went around the representatives of each country asking for their support. They all pledged it.
When it came to Geithner's turn, he said the US would not make any direct financial contribution but would support Thailand indirectly through the IMF, of which it was a major shareholder.
Before leaving for Tokyo, Thanong Bidyana, the finance minister, asked himself how big a package he would try to muster. He worked out that if he could only get US$10 billion to $11 billion it would not be enough.
However, in the end he got a commitment for at least $15 billion. Japan would contribute a large chunk of $4 billion, and so would the IMF.
Hong Kong, Malaysia and Singapore would hand $1 billion each to Thailand from their foreign-exchange reserves. Indonesia and South Korea, which were then not facing a crisis, agreed to give a share of $500 million each.
It was a display of East Asia regional solidarity. However, the package would need final approval from the IMF's executive board. It would also be managed by the IMF.
The rationale of the $17.2-billion rescue, the eventual size of the package, was that it would provide support for the balance of payments, which had been facing heavy capital outflow.
Since Thailand was also facing a confidence crisis, it had to show the world that it would undertake a drastic economic and financial reform. Most importantly, it would be committed to tackling the financial-system crisis through a credible package.
The IMF, however, would not allow the package to be used for support of the financial system. This would have to come directly from the government's budget. Since Thailand was incurring about $8 billion to $9 billion in current-account deficit a year, there would be $8 billion in extra money to finance the foreign-exchange reserves and other debts, including the foreign-exchange-swap obligations.
At that point, the Thai regulators still hoped that money was not the problem. It needed the IMF badge to wear on its shoulder because a credible policy package would keep the investors from pulling out of the country, then improving the situation.
With this $17.2-billion package, Thanong was gratified that at least Thailand would have some dollars to pay the creditors who wanted their dollars back. However, hopefully not all the creditors of the US$90 billion would come at the same time.
This was the second step, an attempt to gain the confidence of the investors and creditors. In the third stage, the financial system had to be put under control.
"The Japanese said if Thailand was brave enough to raise VAT from 7 per cent to 10 per cent they would support us, because they realised that not many countries' prime ministers would last under that kind of political pressure," Thanong recalled.
Thanong assured them that Prime Minister Chavalit Yongchaiyudh would survive the VAT increase. The Japanese warned him that Margaret Thatcher, the British prime minister, had had to resign because of her plan to raise taxes and several Japanese governments had failed to raise VAT to the level they really wanted and it remained at only 5 per cent.
In the end, the VAT increase in Thailand did not provoke much political resistance. It was a fait accompli.
Chavalit initially phoned Michel Camdessus, the managing director of the IMF, who was then travelling in his home country of France, to negotiate the VAT hike. Chavalit tried to win support for a gradual increase. He asked for an increase to 8 per cent. Camdessus did not agree.
Chavalit tried to bargain for a 9-per-cent rate. Again Camdessus shook his head. Finally Chavalit had to give in. It was a demand of the creditors that he had to accept.
Then people began to ask Chavalit about the value of the baht under the managed-float system. He said that in the long run the baht should stand at Bt29 to the dollar, plus or minus Bt1.
After Chaiyawat Wibulsawadi was appointed on July 28, 1997 to replace Rerngchai Marakanond as central-bank governor, his immediate task was to negotiate the details of a rescue package with the IMF. Chaiyawat was constantly on the phone to Stanley Fischer, the first deputy managing director of the IMF. They knew each other well, as Fischer was Chaiyawat's professor when he was studying for his PhD in economics at the Massachusetts Institute of Technology.
The talks between them laid the groundwork for Thailand's first letter of intent with the IMF.
Fischer dealt with Chaiyawat by talking straight. As a condition for securing the IMF programme, Thailand needed to disclose its foreign-exchange-swap obligations, he said.
The foreign-currency-swap contracts had been piled up since late 1996 by the central bank to delay acting on the currency-peg system. At that point, the central bank's reserves were almost depleted, if futures contracts of $20 billion entered into with hedge funds or speculators were taken into account.
The contracts were the central bank's top secret, disclosure of which would undermine confidence in the Thai currency.
Chaiyawat was alarmed by this demand. However, Fischer made his point clear: the condition was not imposed by him but by US Treasury Secretary Robert Rubin and his deputy Lawrence Summers. Both were closely following developments in Thailand.
Rubin was indeed the master of the IMF. Disclosing the swap contracts was one of the three main conditions imposed by Rubin, aside from transparency and abolition of the two-tier currency system. If the conditions were not met, the US would block Thailand's attempt to secure the IMF package.
Chaiyawat did not have any bargaining chip to oppose to this. Indeed, no country on its knees to the IMF help has any foreign-exchange reserves left.
During the talks, Fischer was particularly tough. Chaiyawat was fuming inside. He did not like the way Fischer lectured him about what Thailand could do and what it could not do. At one point, he was so angry with the conditions laid down by Fischer that he told the number-two man at the IMF to fax him 50 conditions - if the IMF had that many in mind - of the rescue package, so that he could try to address them all in one session.
He then could spell out which medicines Thailand could swallow and which ones it would not take.
Chaiyawat tried his best to avoid the possibility that Thailand would not get the rescue support from the IMF. If Fischer were to write a report to the IMF's executive board saying that Thailand was just kidding around with its financial and economic reform programme that would be the end of it.
However, Fischer tried to show sympathy. He said he loved Thailand, but he admitted that the Thai programme would be a difficult one to swallow. It would involve a one-time 3-per-cent increase in VAT to 10 per cent, as well as the need to close down 42 insolvent finance companies.
Meanwhile, the 1997-1998 budget would have to register a surplus of 1 per cent, equivalent to the gross domestic product, in order for Thailand to show to the world that it was serious about dealing with its current-account deficit and setting aside the budget for financial restructuring.